Scott Miller on Value Investing SumZero – June 14, 2018 Scott Miller is the Founder and Portfolio Manager of Greenhaven Road Capital. Prior to founding Greenhaven Road, Miller founded an education company called Accelero that grew to 1000+ employees. Kevin Harris from SumZero sat down with Scott Miller to discuss Greenhaven Road Capital, small cap […] read more

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Active management has always had a problem with diminishing returns at scale. Now one seed funding platform is actually telling managers that ‘assets are the enemy’. Delegates at the recent Opalesque Connecticut Roundtable argue that it’s more important for emerging managers to focus on performance.

“I think that traditionally seeding has been about scale,” says Don Rogers, Founder and Managing Partner, Stride Capital Group a hedge fund seeding firm. The bigger a manager gets – Rogers argues – the better the economics for a seed investor, regardless of what happens to other LPs. But now that the market is more crowded, perhaps the model needs to change.

“Today, finding new teams that can compete with very large, very sophisticated, well-established competitors that dominate a lot of sectors in a very liquid market is very hard. So rather than replicate what has been successful in the past, we try to find new, unique areas of opportunity around the world. Sometimes those areas may even be capacity constrained,” Rogers explains. “Our main aim is sustainably higher returns for LPs, not scale.”

In order to compete in a saturated market, new managers may have to be willing to run smaller more dynamic funds in order to stand out.

“Investors and managers really have to understand the issue of strategy capacities,” says Rick Doucette, CEO and CIO, at Antecapio Investment Partners. “Even back in the ’90s, there were managers who had phenomenal returns until their assets got over $20 billion. When they hit $20 billion, they underperformed, why? Because the capacity they were managing exceeded the domain they were the expert in.”

Doucette argues that as managers have reached for assets over performance they often push into new areas and delegate trading to people with different levels of talent which doesn’t always pan out. “The by-product of running a lot of money forced them out of their area of expertise which in turn increased the risk profile of the portfolio. Or, they were forced to rely upon delegation to other people who they thought were really good in that market. But, delegation is also a risk,” he says.

As Opalesque recently reported, for managers that have already opted to focus on building a track record, investors are willing to come in as well and stick around because they are looking for uncorrelated sources of return. “What we’re seeing is the natural evolution of a marketplace and we have to be responsive to that,” Doucette said.

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